Turn the clock back 18 months and the ­once-in-a-century mining investment boom was in full swing on the assumption that ­Chinese demand for resources would continue to soar, the official cash rate was 4.25 per cent, Commonwealth Bank of Australia shares were changing hands at $50 apiece and the Australian dollar was trading at $US1.03.

The macro-economic environment offered something for everyone. Retirees were earning a healthy 5 per cent on bank deposits, investors with an appetite for risk had a plethora of mining stocks from which to choose and the rising Australian dollar was helping to attract overseas investors to these shores, boosting asset prices. ­Investors who could not decide what stocks to buy need only have invested in the S&P/ASX 200 index.

Fast-forward to June 2013 and the landscape is stark. Economists expect the cash rate to fall to between 2 per cent and 2.5 per cent and the Australian dollar to fall to between $US0.80 and $US0.85.

Annual GDP growth has slowed to 2.5 per cent (a two-year low) and it remains to be seen whether the non-mining sector will be able to take over as the engine of the economy. Furthermore, there are headwinds facing overseas markets – Europe is still in the doldrums and there are fears the US Federal Reserve will turn off the money taps sooner rather than later. And last month CBA shares ($74.18 at the time) were ranked the most expensive bank shares in the world.

Where should investors turn?

Asked recently what kept him awake at night,
Russell Investments
managing ­director of multi-asset funds
Andrew Sneddon
listed three concerns: the lofty Australian dollar, low Australian cash rates and the outlook for ­Australian shares.

He is not the only expert with a ­furrow in his brow.

“It’s a more difficult environment. Earnings are slowing and valuations are stretched. There are no free lunches," says
Matthew Sherwood
, head of investment market research at
Perpetual
.

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Finding opportunities

But, say professional investors, the gloom should not be overdone. Financial markets are not without opportunities. It just means that investors might have to get out of their comfort zones to exploit those opportunities.

Investing offshore is one potential route to decent returns, say experts. Another is buying local stocks long viewed as the ugly ducklings of the market.

A strategy of relying on bank shares to push up the value of a portfolio is unlikely to work like it has in recent months. Meanwhile, fixed income looks expensive and cash rates are unattractive.

“Absolutely, it is time to get rid of the home bias," says
Toby Lewis
, investment strategist at
Citibank
.

“It’s been a difficult decade for Australian investors offshore. The strong Australian dollar has wiped out investment returns. Now is definitely the time to use the strength of the dollar to buy overseas assets."

Says
AMP Capital
chief economist
Shane Oliver
: “With the resources boom behind us, and the US [and] Japan and Europe looking healthier or less threatening at the margin, Australia is likely to be a relative underperformer in the year ahead, particularly as the Australian dollar heads lower."

Macquarie Private Wealth
concurs.

“Our view is that the US business cycle is on the upswing, even if only modest, while Australia’s cycle is continuing to progress into a slowdown," said the bank in a recent note.

Offshore prospects

Experts list several reasons for ­considering international shares.

Economic growth in the US is likely to accelerate, while the Chinese economy should stage a modest recovery. Recent data suggests China is growing at about 7.5 per cent a year, “which is pretty good", notes Oliver.

The US dollar, already trading at below 95¢, is expected to fall further over the next two to three years and most strategists are sanguine about the prospect of an end to so-called quantitative easing by the US central bank.

Morgan Stanley
head of investment strategy
Malcolm Woods
predicts the Federal Reserve won’t stop its bond-buying program until the end of the year and, when it does, it will signal the economy is on a sound footing.

The preferred offshore destinations are the US and emerging markets.

Apart from US growth prospects, Morgan Stanley points out the price earnings multiple on the S&P500 is 14 times forward earnings, a 10 per cent discount to the long-term average.

Russell also notes many investors have missed out on the bull run in the US and suggests American savers may move money out of bond funds into equity funds in the hope of ­further gains.

That is not to say investors should throw caution to the wind, given the US market has enjoyed a big bounce. Citibank’s Lewis argues the S&P500 is a buying opportunity at levels below 1600. “But you have to have a long-term horizon," he warns.

Lewis also likes emerging markets.

Selective buying

In the local market, most strategists believe there are buying opportunities but say investors will need to be more selective.

Macquarie Private Wealth also likes global industrial companies, adding to that list pharmaceutical company
CSL
, share registry group
Computershare
and cement group
James Hardie
.

Morgan Stanley’s Woods says the bull run in high-yield stocks is largely over, “but not completely". “Buy yield with a story," he adds.

Financial services company AMP, Woods predicts, will benefit from increased inflows as private investors grow more confident, while
Stockland
should improve with a pick-up in the ­residential property market, insurers
Suncorp
and
IAG
should benefit from higher premiums and strong cost ­management, and oil and gas company
Woodside
has shifted to a higher ­payout ratio.